What is an economic downturn?

An economic downturn, often referred to as simply a downturn, occurs when the value of stocks, property, and commodities fall, productivity either grows more slowly or declines, and GDP (gross domestic product) shrinks, stands still or expands more slowly.

An economic downturn is part of the economic cycle (sometimes referred to as trade cycle or business cycle) – the natural fluctuation of the economy between periods of growth and contraction.

In most cases, a downturn refers to the downward movement on the graph – but the term is sometimes used by analysts and the press when talking about a slowdown in growth.

On two occasions, an economic downturn was the prelude to a recession in the UK from 2007 to 2013.

During a downturn unemployment may rise, investors may lose a lot of money, people will take longer to sell their homes and will probably have to lower their prices, companies spend less on investment, and consumer spending and borrowing declines.

Economic downturn and borrowing trends

Borrowing by consumers and businesses goes down for two main reasons during a downturn:

1. If people are worried about their jobs, they are less likely to want to get into debt or further into debt.

2. Banks become more cautious who they lend money to, i.e. getting a loan becomes more difficult.

Governments often have to borrow more during a downturn, because their tax revenues are smaller. There may also be rising spare capacity, i.e. companies produce less than they are able to.

An economic downturn may emerge as a country’s economy enters into a recessionary period, or when the first signs of GDP contraction start to appear.